See accompanying notes to condensed consolidated financial statements (unaudited)
See accompanying notes to condensed consolidated financial statements (unaudited)
See accompanying notes to condensed consolidated financial statements (unaudited)
See accompanying notes to condensed consolidated financial statements (unaudited)
See accompanying notes to condensed consolidated financial statements (unaudited)
See accompanying notes to condensed consolidated financial statements (unaudited)
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1)
|
Summary of Significant Accounting Policies
|
The accounting principles followed and the methods of applying those principles conform with accounting principles generally accepted in the United States of America and to general practices in the banking industry. The significant accounting policies applicable to Avenue Financial Holdings, Inc. (the Corporation) and its wholly owned subsidiary, Avenue Bank (the Bank) (collectively, the Company) are summarized as follows.
The Company provides a variety of financial services to individuals and middle market businesses through its offices in middle Tennessee. Its primary deposit products are checking, savings, money market and term certificate accounts and its primary lending products are residential real estate, commercial and industrial, commercial real estate, construction and consumer loans.
|
(c)
|
Basis of Presentation
|
The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the three months ended March 31, 2016, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2016. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, the accompanying unaudited consolidated financial statements should be read in conjunction with the Corporation’s consolidated financial statements and related notes appearing in the 2015 Annual Report previously filed on Form 10-K. The consolidated balance sheet of the Company as of December 31, 2015 has been derived from the audited consolidated balance sheet of the Company as of that date.
In preparing consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets, other real estate owned, and investment securities including other-than-temporary impairment.
All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The payments received on these loans are applied to the principal balance until the loan qualifies for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current with on time payments for six consecutive months and future payments are reasonably assured.
|
(e)
|
Recent Accounting Pronouncements
|
In April 2015, the FASB issued
Accounting Standards Update (ASU) 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which changes the
presentation of debt issuance costs in financial statements.
ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue t
o be reported as interest expense. It was effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company early adopted
ASU 2015-03 on June 30, 2015 at which time the Company reclassified approximately $404,000 of debt issuance costs associated with the Company's subordinated debt from other assets to subordinated debt on the Consolidated Balance Sheet. A reclassification was also applied retrospectively to each prior period presented.
In June 2014, the FASB issued ASU No. 2014-12
Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the
9
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Requisite Service Period
. ASU 2014-12 requires that a pe
rformance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015. The amendments can be appl
ied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards therea
fter. Early adoption is permitted. The Company adopted ASU 2014-12 on January 1, 2016 and it did not have a material impact on its accounting and disclosures.
In May 2014, the FASB issued ASU No. 2014-09
Revenue from Contracts with Customers (Topic 606)
. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is permitted but not before the original public entity effective date, i.e., annual periods beginning after December 15, 2016. The Company is assessing the impact of ASU 2014-09 on its accounting and disclosures.
In February 2016, the FASB issued
ASU 2016-2,
Leases
(Topic 842). ASU 2016-2, among other things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and
Topic 606
,
Revenue from Contracts with Customers
. ASU 2016-2 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities and all nonpublic entities upon issuance. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
|
(f)
|
Income Per Common Share
|
Basic net income per common share available to common stockholders is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period. Diluted net income per common share available to common stockholders excludes any common stock options or restricted share awards agreements whose exercise would be antidilutive. Typically the difference between basic and diluted weighted average shares outstanding is attributable to common stock options and restricted share awards. For the three months ended March 31, 2016 and 2015, there were no antidilutive stock options calculated under the treasury stock method as the strike price for an option was above the fair market value of a common share. The Company also calculated earnings per common share using the two-class method and determined that there was no material impact for the three months ended March 31, 2016 and 2015.
10
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following is a summary of the basic and diluted earnings per common share calculation for each
of the three months ended March 31, 2016 and 2015:
|
|
At or for the
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in Thousands, Except Share Data)
|
|
Basic earnings per share calculation:
|
|
|
|
|
|
|
|
|
Numerator
- Net income available to common stockholders
|
|
$
|
1,413
|
|
|
|
1,422
|
|
|
|
|
|
|
|
|
|
|
Denominator
– Weighted average common shares outstanding
|
|
|
10,152,331
|
|
|
|
9,319,312
|
|
Basic net income per common share available to
common stockholders
|
|
$
|
0.14
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share calculation:
|
|
|
|
|
|
|
|
|
Numerator
- Net income available to common stockholders
|
|
|
1,413
|
|
|
|
1,422
|
|
|
|
|
|
|
|
|
|
|
Denominator
– Average common shares outstanding
|
|
|
10,152,331
|
|
|
|
9,319,312
|
|
Average diluted common shares outstanding
|
|
|
188,184
|
|
|
|
116,053
|
|
Weighted average common shares outstanding
|
|
|
10,340,515
|
|
|
|
9,435,365
|
|
Diluted net income per common share available to
common stockholders
|
|
$
|
0.14
|
|
|
|
0.15
|
|
Certain items in prior financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on net income.
11
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In 2015, management evaluated all operating leases to prepare for the upcoming accounting pronouncement ASU 2016-2. The discount rate initially selected to calculate the present value of the minimum lease payments related to the lease for the Green Hill Branch was not the incremental borrowing rate. It was determined that the incremental borrowing rate of 5.59% at lease inception was more appropriate. Due to this change the present value of lease payments exceeded 90% of the fair value of the building at inception of the lease, resulting in capital lease classification rather than operating lease classification, as previously reflected in the Company’s consolidated financial statements. The Company assessed the materiality of the capital lease classification on its financial statements for previously issued financial statements in accordance with SEC’s Staff Accounting Bulletin (SAB) No. 99 and concluded that the impact of the adjustments was not material to its financial statements had the errors been corrected for prior period financial statements. Accordingly, the March 31, 2015 consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of cash flows were revised to correct the change in presentation. The change in presentation for the lease resulted in a decrease in net income of $4,000 as of March 31, 2015.
The effects of the necessary adjustments and related tax impact on the Company's consolidated financial statements for the three months ended March 31, 2015 are detailed in the following tables:
|
|
March 31, 2015
|
|
|
|
As Previously Reported
|
|
|
Revision
|
|
|
As Revised
|
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
Condensed Consolidated Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
Obligation under capital lease agreement
|
|
$
|
-
|
|
|
|
73
|
|
|
|
73
|
|
Total interest expense
|
|
|
1,269
|
|
|
|
73
|
|
|
|
1,342
|
|
Net interest income
|
|
|
7,566
|
|
|
|
73
|
|
|
|
7,493
|
|
Net interest income after provision for loan losses
|
|
|
7,412
|
|
|
|
73
|
|
|
|
7,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and occupancy
|
|
|
840
|
|
|
|
(66
|
)
|
|
|
774
|
|
Total noninterest expenses
|
|
|
6,474
|
|
|
|
(66
|
)
|
|
|
6,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
2,194
|
|
|
|
(7
|
)
|
|
|
2,187
|
|
Income tax expense
|
|
|
736
|
|
|
|
(3
|
)
|
|
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,458
|
|
|
|
(4
|
)
|
|
|
1,454
|
|
Net income available to common stockholders
|
|
|
1,426
|
|
|
|
(4
|
)
|
|
|
1,422
|
|
Earnings per share-basic
|
|
|
0.15
|
|
|
|
-
|
|
|
|
0.15
|
|
Earnings per share-diluted
|
|
|
0.15
|
|
|
|
-
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,458
|
|
|
|
(4
|
)
|
|
|
1,454
|
|
Comprehensive income
|
|
|
2,586
|
|
|
|
(4
|
)
|
|
|
2,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,458
|
|
|
|
(4
|
)
|
|
|
1,454
|
|
Deferred tax expense
|
|
|
(33
|
)
|
|
|
(3
|
)
|
|
|
(36
|
)
|
Depreciation and amortization of premises and equipment
|
|
|
247
|
|
|
|
56
|
|
|
|
303
|
|
Decrease in other liabilities
|
|
|
(1,369
|
)
|
|
|
(18
|
)
|
|
|
(1,387
|
)
|
Principal payments of capital lease obligation
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
(31
|
)
|
12
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2016 and December 31, 2015 are summarized as follows:
|
|
March 31, 2016
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
15,062
|
|
|
|
58
|
|
|
|
-
|
|
|
|
15,120
|
|
State and municipal securities
|
|
|
44,417
|
|
|
|
1,334
|
|
|
|
4
|
|
|
|
45,747
|
|
Corporate notes
|
|
|
12,633
|
|
|
|
137
|
|
|
|
10
|
|
|
|
12,760
|
|
Mortgage-backed securities
|
|
|
89,320
|
|
|
|
710
|
|
|
|
442
|
|
|
|
89,588
|
|
|
|
$
|
161,432
|
|
|
|
2,239
|
|
|
|
456
|
|
|
|
163,215
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities
|
|
$
|
8,206
|
|
|
|
48
|
|
|
|
-
|
|
|
|
8,254
|
|
Mortgage-backed securities
|
|
|
3,707
|
|
|
|
20
|
|
|
|
-
|
|
|
|
3,727
|
|
|
|
$
|
11,913
|
|
|
|
68
|
|
|
|
-
|
|
|
|
11,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
41,340
|
|
|
|
128
|
|
|
|
642
|
|
|
|
40,826
|
|
State and municipal securities
|
|
|
46,830
|
|
|
|
964
|
|
|
|
58
|
|
|
|
47,736
|
|
Corporate notes
|
|
|
12,658
|
|
|
|
-
|
|
|
|
71
|
|
|
|
12,587
|
|
Mortgage-backed securities
|
|
|
110,093
|
|
|
|
335
|
|
|
|
2,003
|
|
|
|
108,425
|
|
|
|
$
|
210,921
|
|
|
|
1,427
|
|
|
|
2,774
|
|
|
|
209,574
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities
|
|
$
|
8,208
|
|
|
|
64
|
|
|
|
-
|
|
|
|
8,272
|
|
Mortgage-backed securities
|
|
|
3,729
|
|
|
|
-
|
|
|
|
37
|
|
|
|
3,692
|
|
|
|
$
|
11,937
|
|
|
|
64
|
|
|
|
37
|
|
|
|
11,964
|
|
Gross realized gains and losses from security sales for the three months ended March 31, 2016 and 2015 are as follows:
|
|
At or for the
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
Gross realized gains
|
|
$
|
279
|
|
|
|
-
|
|
Gross realized losses
|
|
|
(51
|
)
|
|
|
-
|
|
Realized gains and losses from securities sales are recognized in the consolidated statements of income upon disposition of the securities using the specific identification method on a trade date basis. Proceeds from sales totaled $41.2 million for the three months ended March 31, 2016. There were no sales for the three months ended March 31, 2015.
13
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Expected maturities of mortgage backed securities will differ from contract
ual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
The amortized cost and estimated fair value of securities at March 31, 2016, by contractual maturity, are shown below:
|
|
Available-for-sale
|
|
|
Held-to-maturity
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
Due in one year or less
|
|
$
|
1,829
|
|
|
|
1,833
|
|
|
|
-
|
|
|
|
-
|
|
Due in one year to five years
|
|
|
17,083
|
|
|
|
17,345
|
|
|
|
-
|
|
|
|
-
|
|
Due in five years to ten years
|
|
|
26,506
|
|
|
|
27,078
|
|
|
|
1,503
|
|
|
|
1,527
|
|
Due after ten years
|
|
|
26,694
|
|
|
|
27,371
|
|
|
|
6,703
|
|
|
|
6,727
|
|
Mortgage-backed securities
|
|
|
89,320
|
|
|
|
89,588
|
|
|
|
3,707
|
|
|
|
3,727
|
|
|
|
$
|
161,432
|
|
|
|
163,215
|
|
|
|
11,913
|
|
|
|
11,981
|
|
Securities with an amortized cost of $25.9 million and $24.7 million and fair value of $25.8 million and $24.5 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure deposits, borrowings and for other purposes as required or permitted by law.
Security fair values are established by an independent pricing service as of the approximate dates indicated. The difference between book value and fair value reflects current interest rates and represents the potential gain (loss) had the portfolio been liquidated on those dates.
At March 31, 2016 and December 31, 2015, the Bank did not hold investment securities of any single issuer, other than obligations of U.S. government agencies, whose aggregate book value exceeded 10% of stockholders’ equity.
Securities available-for-sale and held-to-maturity with unrealized losses as of March 31, 2016 and December 31, 2015, and the length of time they have been in continuous loss positions were as follows:
|
|
Investments with an Unrealized Loss of less than 12 months
|
|
|
Investments with an Unrealized Loss 12 months or longer
|
|
|
Total Investments with an Unrealized Loss
|
|
|
|
Fair value
|
|
|
Unrealized losses
|
|
|
Fair value
|
|
|
Unrealized losses
|
|
|
Fair value
|
|
|
Unrealized losses
|
|
|
|
(In Thousands)
|
|
As of March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities
|
|
$
|
303
|
|
|
|
(2
|
)
|
|
|
538
|
|
|
|
(2
|
)
|
|
|
841
|
|
|
|
(4
|
)
|
Corporate notes
|
|
|
4,290
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,290
|
|
|
|
(10
|
)
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
42,335
|
|
|
|
(442
|
)
|
|
|
42,335
|
|
|
|
(442
|
)
|
Total temporarily impaired
|
|
$
|
4,593
|
|
|
|
(12
|
)
|
|
|
42,873
|
|
|
|
(444
|
)
|
|
|
47,466
|
|
|
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
14,384
|
|
|
|
(534
|
)
|
|
|
4,892
|
|
|
|
(108
|
)
|
|
|
19,276
|
|
|
|
(642
|
)
|
State and municipal securities
|
|
|
3,630
|
|
|
|
(14
|
)
|
|
|
1,962
|
|
|
|
(44
|
)
|
|
|
5,592
|
|
|
|
(58
|
)
|
Corporate notes
|
|
|
12,587
|
|
|
|
(71
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
12,587
|
|
|
|
(71
|
)
|
Mortgage-backed securities
|
|
|
36,295
|
|
|
|
(397
|
)
|
|
|
54,279
|
|
|
|
(1,606
|
)
|
|
|
90,574
|
|
|
|
(2,003
|
)
|
Total temporarily impaired
|
|
$
|
66,896
|
|
|
|
(1,016
|
)
|
|
|
61,133
|
|
|
|
(1,758
|
)
|
|
|
128,029
|
|
|
|
(2,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
3,692
|
|
|
|
(37
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,692
|
|
|
|
(37
|
)
|
14
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As noted in the table above, at March 31, 2016, the Bank had unrealized losses of $456,000 on $47.5 million of available-for-sale and held-to-maturity securities. The Bank does not consider these securities to be other-than-temporarily impaired. Unrealized losses on securities issued by states and political subdivisions in the U.S., U.S. government agency securities, and mortgage backed securities have not been recognized into income because the securities are backed by the U.S. government, its agencies, or political subdivisions for municipal bonds and management has the intent and ability to hold these securities until maturity. For corporate bonds with unrealized losses, the Bank currently does not intend to sell these securities and it is more likely than not that the Bank will have the intent and ability to hold these securities to recovery of their amortized cost. The decline in value of these securities is primarily attributable to interest rates and not credit losses.
(3)
|
Loans and Allowance for Loan Losses
|
The Bank has six loan segments for financial reporting purposes, residential real estate, commercial and industrial, commercial real estate, construction and land development, consumer, and other. The Bank classifies its loan portfolio based on the underlying collateral utilized to secure each loan. These classifications are consistent with those utilized in the Quarterly Report of Condition and Income, filed by the Bank with the Federal Deposit Insurance Corporation (FDIC).
|
•
|
Residential real estate loans are classified into two categories based on the underlying collateral securing the loans. They consist of primarily of mortgage loans secured by 1-4 family residential properties including home equity lines of credit and multi-family properties secured primarily by apartment buildings. Repayment is subject to the borrower’s personal income, credit rating, debt level, character in fulfilling payment obligations, employment conditions, and changes in property values on residential properties.
|
|
•
|
Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Risks include adequacy of cash flow, reasonableness of profit projections, interest rate, financial leverage, economic trends, management ability, and others.
|
|
•
|
Commercial real estate mortgage loans are categorized as such based on investor exposures where repayment is largely dependent upon the operation, refinance, or sale of the underlying real estate. Commercial real estate mortgage loans also include owner occupied commercial real estate which shares a similar risk profile to our commercial and industrial loan products. These loans are originated based on the borrower's ability to service the debt and secondarily based on the fair value of the underlying collateral. These loans may also incorporate a personal guarantee. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, interest rates or in the general economy.
|
|
•
|
Construction and land development loans include loans where the repayment is dependent on the successful operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development. The terms of these loans are generally short-term with some loans converting to permanent financing upon completion and may incorporate a personal guarantee. These loans are made on a projected cash flow basis and are secured by the project being constructed. Risks include loan amount in relation to construction delays and overruns, vacancies, collateral value subject to market value fluctuations, interest rate, market demands, borrower’s ability to repay, and others. Construction loans can include interest reserves to carry the project through to completion.
|
|
•
|
Consumer loans include all loans issued to individuals not included in the residential real estate mortgage classification. Examples of consumer loans are automobile loans and personal lines of credit. Success in repayment is subject to the borrower’s personal income, credit rating, debt level, character in fulfilling payment obligations, employment conditions, and others. Risks are mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers and may be secured by consumer assets such as automobiles.
|
|
•
|
Other loans include all loans not included in the consumer classification, such as unsecured loans to religious organizations. Repayment of these loans is primarily dependent on the identified cash flows of the borrower, which can be impacted by economic conditions in their market areas such as unemployment levels.
|
15
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the balance of loans outstanding by segment and class as of March 31, 2016 and December 31, 2015:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
(In Thousands)
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
137,884
|
|
|
|
123,478
|
|
Multi-family
|
|
|
10,378
|
|
|
|
10,048
|
|
Commercial and industrial
|
|
|
357,061
|
|
|
|
312,382
|
|
Commercial real estate
|
|
|
317,095
|
|
|
|
282,698
|
|
Construction and land development
|
|
|
120,128
|
|
|
|
105,886
|
|
Consumer
|
|
|
15,125
|
|
|
|
11,796
|
|
Other
|
|
|
1,150
|
|
|
|
799
|
|
Total loans
|
|
|
958,821
|
|
|
|
847,087
|
|
Net deferred loan origination costs and fees
|
|
|
(1,304
|
)
|
|
|
(1,266
|
)
|
Less allowance for loan losses
|
|
|
(10,889
|
)
|
|
|
(10,061
|
)
|
Net loans
|
|
$
|
946,628
|
|
|
|
835,760
|
|
Commercial loans are assigned risk ratings by the lender that are subject to validation by a third party loan reviewer or the Bank’s internal credit committee. Risk ratings are categorized as pass, special mention, substandard, non-accrual and doubtful. As of March 31, 2016, approximately 70% of the loan portfolio was classified as a commercial loan type and was specifically assigned a pass risk rating. Pass rated loans include all loans other than those included in special mention, substandard, non-accrual and doubtful, which are defined as follows:
|
·
|
Special mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.
|
|
·
|
Substandard loans are inadequately protected by the current worth and paying capacity of the borrower or the collateral pledged, if any. Assets so classified must have a well defined weakness or weaknesses that jeopardize collection of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. These loans may be considered impaired, if in management’s judgment, the loan is either collateral dependent or the credit is weakened by the borrower’s financial condition.
|
|
·
|
Non-accrual loans have the traits of substandard loans; however, repayment of principal and interest is uncertain. The weaknesses of these loans make it more probable than not that repayment of principal and interest will not occur per contractual obligation.
|
|
·
|
Doubtful loans have the traits of non-accrual loans; however, repayment of principal and interest is doubtful. Loss on all or a portion of principal is anticipated.
|
16
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following tables present the loan balances (recorded investment) by segment as well as risk rating category as of March 31, 2016 and December 31, 2015:
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Non-accrual
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
Grade 1-5
|
|
|
Grade 6
|
|
|
Grade 7
|
|
|
Grade 8
|
|
|
Grade 9
|
|
|
Loans
|
|
|
|
(In Thousands)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
136,962
|
|
|
|
-
|
|
|
|
766
|
|
|
|
156
|
|
|
|
-
|
|
|
|
137,884
|
|
Multi-family
|
|
|
10,378
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,378
|
|
Commercial and industrial
|
|
|
356,713
|
|
|
|
-
|
|
|
|
248
|
|
|
|
100
|
|
|
|
-
|
|
|
|
357,061
|
|
Commercial real estate
|
|
|
316,943
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
317,095
|
|
Construction and land development
|
|
|
119,715
|
|
|
|
-
|
|
|
|
413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,128
|
|
Consumer
|
|
|
15,008
|
|
|
|
-
|
|
|
|
92
|
|
|
|
25
|
|
|
|
-
|
|
|
|
15,125
|
|
Other
|
|
|
1,150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,150
|
|
|
|
$
|
956,869
|
|
|
|
-
|
|
|
|
1,519
|
|
|
|
433
|
|
|
|
-
|
|
|
|
958,821
|
|
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Non-accrual
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
Grade 1-5
|
|
|
Grade 6
|
|
|
Grade 7
|
|
|
Grade 8
|
|
|
Grade 9
|
|
|
Loans
|
|
|
|
(In Thousands)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
122,497
|
|
|
|
-
|
|
|
|
737
|
|
|
|
244
|
|
|
|
-
|
|
|
|
123,478
|
|
Multi-family
|
|
|
10,048
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,048
|
|
Commercial and industrial
|
|
|
311,944
|
|
|
|
-
|
|
|
|
310
|
|
|
|
128
|
|
|
|
-
|
|
|
|
312,382
|
|
Commercial real estate
|
|
|
282,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
282,698
|
|
Construction and land development
|
|
|
105,462
|
|
|
|
-
|
|
|
|
424
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,886
|
|
Consumer
|
|
|
11,770
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
11,796
|
|
Other
|
|
|
799
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
799
|
|
|
|
$
|
845,066
|
|
|
|
-
|
|
|
|
1,471
|
|
|
|
550
|
|
|
|
-
|
|
|
|
847,087
|
|
As of March 31, 2016 and December 31, 2015, all loans classified as non-accrual were considered to be impaired. In addition, certain substandard loans were determined to be impaired due to management’s knowledge of certain facts surrounding the credit such as lack of collateral or limited cash flow. The principal balance of these impaired loans amounted to $1.2 million as of March 31, 2016 and December 31, 2015. At the date that impaired loans were placed on non-accrual status, the Bank reversed all previously accrued interest income against the current year earnings. The payments received on these loans are applied to the principal balance until the loan qualifies for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current with on time payments for six consecutive months and future payments are reasonably assured.
17
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Additional information on the Bank’s impaired loans that were evaluated for specific loss allowance as of March 31,
2016 and December 31, 2015 including the recorded investment on the balance sheet and the unpaid principal balance is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
|
|
Recorded Investment
|
|
|
Unpaid Principal Balance
|
|
|
Related Allowance
|
|
|
|
(In Thousands)
|
|
Impaired loans with no recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
156
|
|
|
|
171
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
100
|
|
|
|
101
|
|
|
|
-
|
|
Commercial real estate
|
|
|
152
|
|
|
|
153
|
|
|
|
-
|
|
Construction and land development
|
|
|
413
|
|
|
|
413
|
|
|
|
-
|
|
Total
|
|
|
821
|
|
|
|
838
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
301
|
|
|
|
301
|
|
|
|
60
|
|
Consumer
|
|
|
117
|
|
|
|
117
|
|
|
|
74
|
|
Total
|
|
|
418
|
|
|
|
418
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
1,239
|
|
|
|
1,256
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
Recorded Investment
|
|
|
Unpaid Principal Balance
|
|
|
Related Allowance
|
|
|
|
(In Thousands)
|
|
Impaired loans with no recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
244
|
|
|
|
259
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
128
|
|
|
|
129
|
|
|
|
-
|
|
Commercial real estate
|
|
|
152
|
|
|
|
153
|
|
|
|
-
|
|
Construction and land development
|
|
|
424
|
|
|
|
424
|
|
|
|
-
|
|
Total
|
|
|
948
|
|
|
|
965
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
272
|
|
|
|
272
|
|
|
|
61
|
|
Consumer
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
Total
|
|
|
298
|
|
|
|
298
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
1,246
|
|
|
|
1,263
|
|
|
|
87
|
|
18
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
(1)
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
(1)
|
|
|
|
(In Thousands)
|
|
Impaired loans with no recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
187
|
|
|
|
1
|
|
|
|
294
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
114
|
|
|
|
-
|
|
|
|
250
|
|
|
|
-
|
|
Commercial real estate
|
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and land development
|
|
|
419
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
872
|
|
|
|
6
|
|
|
|
544
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
271
|
|
|
|
4
|
|
|
|
193
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
|
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
706
|
|
|
|
7
|
|
Consumer
|
|
|
117
|
|
|
|
3
|
|
|
|
38
|
|
|
|
-
|
|
Total
|
|
|
388
|
|
|
|
7
|
|
|
|
1,171
|
|
|
|
7
|
|
Total impaired loans
|
|
$
|
1,260
|
|
|
|
13
|
|
|
|
1,715
|
|
|
|
7
|
|
|
(1)
|
Includes income recognized in earnings for impaired accruing loans only. All non-accrual loans did not have any interest recognized in the three months ended March 31, 2016 and 2015.
|
19
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
(c)
|
Non-accrual and Past Due Loans
|
A loan is considered past due when payment is 30 days or more late based on the contractual terms of the loan. As shown in the table below, the Bank had $122,000 and $147,000 of loans past due 30 days or more that were still accruing as of March 31, 2016 and December 31, 2015, respectively. The following tables present past due balances at March 31, 2016 and December 31, 2015 and by loan segment allocated between performing and non-accrual status:
|
|
30-89 days past due and accruing
|
|
|
90 days or more past due and accruing
|
|
|
Total past due and accruing
|
|
|
Current and accruing
|
|
|
Non-accrual
|
|
|
Total Loans
|
|
|
|
(In Thousands)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,728
|
|
|
|
156
|
|
|
|
137,884
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,378
|
|
|
|
-
|
|
|
|
10,378
|
|
Commercial and industrial
|
|
|
122
|
|
|
|
-
|
|
|
|
122
|
|
|
|
356,839
|
|
|
|
100
|
|
|
|
357,061
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316,943
|
|
|
|
152
|
|
|
|
317,095
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,128
|
|
|
|
-
|
|
|
|
120,128
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,100
|
|
|
|
25
|
|
|
|
15,125
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,150
|
|
|
|
-
|
|
|
|
1,150
|
|
|
|
$
|
122
|
|
|
|
-
|
|
|
|
122
|
|
|
|
958,266
|
|
|
|
433
|
|
|
|
958,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days past due and accruing
|
|
|
90 days or more past due and accruing
|
|
|
Total past due and accruing
|
|
|
Current and accruing
|
|
|
Non-accrual
|
|
|
Total Loans
|
|
|
|
(In Thousands)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123,234
|
|
|
|
244
|
|
|
|
123,478
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,048
|
|
|
|
-
|
|
|
|
10,048
|
|
Commercial and industrial
|
|
|
147
|
|
|
|
-
|
|
|
|
147
|
|
|
|
312,107
|
|
|
|
128
|
|
|
|
312,382
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
282,546
|
|
|
|
152
|
|
|
|
282,698
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,886
|
|
|
|
-
|
|
|
|
105,886
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,770
|
|
|
|
26
|
|
|
|
11,796
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
799
|
|
|
|
-
|
|
|
|
799
|
|
|
|
$
|
147
|
|
|
|
-
|
|
|
|
147
|
|
|
|
846,390
|
|
|
|
550
|
|
|
|
847,087
|
|
At March 31, 2016 and December 31, 2015, all loans classified as non-accrual were deemed to be impaired. The principal balance of these non-accrual loans amounted to $433,000 and $550,000 at March 31, 2016 and December 31, 2015, respectively. At the date such loans were placed on non-accrual status, the Bank reversed all previously accrued interest income against current year earnings. Had these non-accruing loans been on accruing status, interest income would have been higher by $4,000 and $2,000 for the periods ended March 31, 2016 and December 31, 2015, respectively. Management elected to not record payments received in interest income during the periods ended March 31, 2016 and December 31, 2015.
|
(d)
|
Troubled Debt Restructure (TDR)
|
The Bank attempts to work with borrowers, when advantageous to both parties, to extend or modify terms to better align with the borrowers current ability to repay. These extensions and modifications are made in accordance with internal policies, which conform to regulatory guidance. Each modification is unique to the borrower and is evaluated separately, and as such, qualification criteria and payments terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan.
20
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A modification is classified as a TDR
if the borrower is experiencing financial difficulty and it is determined that the Bank has granted a concession to the borrower that would have otherwise not been granted and is not available to other borrowers. The Bank may determine that a borrower is e
xperiencing financial difficulty if the borrower is currently in default on any debt, or if it is probable that a borrower may default in the foreseeable future without a modification. Examples of concessions that would qualify as a TDR include: 1) a redu
ction in interest rates, 2) extension of the maturity date at a rate lower than current market rate for a new loan with similar risk, 3) principal forgiveness, 4) reduction of accrued interest, or 5) a period of interest only payments. When evaluating if i
t is in the Bank’s interest to restructure troubled debt, management may consider whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms. The determination
of whether a restructuring of a loan meets the criteria for classification as a TDR is subjective in nature and management’s judgment is required in the evaluation process. As of March 31, 2016, one consumer loan, two commercial and industrial loans and o
ne commercial real estate loans were newly classified as TDRs. A TDR is considered an impaired loan pursuant to U.S. GAAP. No loans were restructured or modified due to declining credit quality during the three months ended March 31, 2015. The following
table outlines the amount of each TDR categorized by loan segment made during the three months ended March 31, 2016:
|
|
March 31, 2016
|
|
|
|
Number of contracts
|
|
Pre- Modification Outstanding Recorded Investment
|
|
|
Post- Modification Outstanding Recorded Investment
|
|
|
|
(In Thousands, Except Number of Contracts)
|
|
Commercial and industrial
|
|
2
|
|
$
|
100
|
|
|
|
100
|
|
Commercial real estate
|
|
1
|
|
|
152
|
|
|
|
152
|
|
Consumer
|
|
1
|
|
|
90
|
|
|
|
92
|
|
|
|
4
|
|
$
|
342
|
|
|
|
344
|
|
Of the $424,000 in loans reported as TDRs as of December 31, 2015, an additional $342,000 was modified as TDRs during the period ended March 31, 2016. No TDRs were foreclosed upon during the three month periods ended March 31, 2016 and 2015. As of March 31, 2016, and March 31, 2015, there were no commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.
|
(e)
|
Allowance for Loan Losses
|
The adequacy of the allowance for loan losses is assessed by management at the end of each calendar quarter. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. During the three months ended March 31, 2016 the lookback period of the allowance for loan losses methodology for construction and land development loans was changed to six years to reflect an economic cycle and be consistent with other loan types. A five years lookback period was previously used due to outliers in the 2009 data.
Key components of the estimation process are as follows: (1) loans determined by management to be impaired are evaluated individually and specific allowances are determined based on the difference between the outstanding loan amount and the net realizable value of the present value of expected future cash flows or the collateral less estimated cost to sell (if collateral dependent); (2) loans not meeting the definition of impairment are segmented based on similar collateral types and evaluated on a pool basis; (3) loss rates for the segments are calculated based on historical gross charge offs (or minimum loss rates if no historical gross charge offs) over the lookback period determined to be most appropriate by management and, multiplied by the loss emergence period (LEP). The LEP is the period between when initial deterioration in the borrower’s financial capacity is first identified by Bank personnel to the time of charge-off. The historical loss factors are then adjusted by management to reflect the current outlook for each of the following qualitative factors:
|
·
|
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
|
|
·
|
Changes in the experience, ability, and depth of lending management and other relevant staff.
|
|
·
|
Changes in the nature and volume of the portfolio and in the terms of loans.
|
21
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
·
|
Changes in the volume and severity of past
due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
|
|
·
|
The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
|
|
·
|
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
|
The following table presents the balance in the recorded investment in loans by loan segment based on impairment method:
|
|
Real Estate Mortgage
|
|
|
Real Estate Multi-family
|
|
|
Commercial and Industrial
|
|
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Consumer
|
|
|
Other
|
|
|
Total Loans
|
|
|
|
(In Thousands)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
137,884
|
|
|
|
10,378
|
|
|
|
357,061
|
|
|
|
317,095
|
|
|
|
120,128
|
|
|
|
15,125
|
|
|
|
1,150
|
|
|
|
958,821
|
|
Loans individually evaluated for
impairment
|
|
|
457
|
|
|
|
-
|
|
|
|
100
|
|
|
|
152
|
|
|
|
413
|
|
|
|
117
|
|
|
|
-
|
|
|
|
1,239
|
|
Loans collectively evaluated for
impairment
|
|
|
137,427
|
|
|
|
10,378
|
|
|
|
356,961
|
|
|
|
316,943
|
|
|
|
119,715
|
|
|
|
15,008
|
|
|
|
1,150
|
|
|
|
957,582
|
|
Loans acquired with deteriorated
credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
123,478
|
|
|
|
10,048
|
|
|
|
312,382
|
|
|
|
282,698
|
|
|
|
105,886
|
|
|
|
11,796
|
|
|
|
799
|
|
|
|
847,087
|
|
Loans individually evaluated for
impairment
|
|
|
516
|
|
|
|
-
|
|
|
|
128
|
|
|
|
152
|
|
|
|
424
|
|
|
|
26
|
|
|
|
-
|
|
|
|
1,246
|
|
Loans collectively evaluated for
impairment
|
|
|
122,962
|
|
|
|
10,048
|
|
|
|
312,254
|
|
|
|
282,546
|
|
|
|
105,462
|
|
|
|
11,770
|
|
|
|
799
|
|
|
|
845,841
|
|
Loans acquired with deteriorated
credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans less than $25,000 are charged off no later than when the loan becomes 120 days past due. All other loans are charged off when it is determined that the loan is uncollectible. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
22
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table provides a roll forward of the allowance for loan losses from December 31, 2014 to March 31, 2015 and Dec
ember 31, 2015 to March 31, 2016 by loan segment:
|
|
Residential Real-Estate
|
|
|
Commercial and Industrial
|
|
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Balances, December 31, 2015
|
|
$
|
1,329
|
|
|
|
3,191
|
|
|
|
2,940
|
|
|
|
2,512
|
|
|
|
85
|
|
|
|
4
|
|
|
|
10,061
|
|
Charged-off loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recovery of previously
charged-off loans
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
Provision for loan losses
|
|
|
329
|
|
|
|
(134
|
)
|
|
|
481
|
|
|
|
27
|
|
|
|
67
|
|
|
|
4
|
|
|
|
774
|
|
Balances, March 31, 2016
|
|
$
|
1,658
|
|
|
|
3,108
|
|
|
|
3,421
|
|
|
|
2,542
|
|
|
|
152
|
|
|
|
8
|
|
|
|
10,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2014
|
|
$
|
1,244
|
|
|
|
2,402
|
|
|
|
3,131
|
|
|
|
1,675
|
|
|
|
62
|
|
|
|
4
|
|
|
|
8,518
|
|
Charged-off loans
|
|
|
-
|
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
Recovery of previously
charged-off loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
Provision for loan losses
|
|
|
47
|
|
|
|
(38
|
)
|
|
|
168
|
|
|
|
(39
|
)
|
|
|
16
|
|
|
|
-
|
|
|
|
154
|
|
Balances, March 31, 2015
|
|
$
|
1,291
|
|
|
|
2,289
|
|
|
|
3,299
|
|
|
|
1,708
|
|
|
|
78
|
|
|
|
4
|
|
|
|
8,669
|
|
The following table presents the balance in the allowance for loan losses by loan segment based on impairment method:
|
|
Residential Real-Estate
|
|
|
Commercial and Industrial
|
|
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Balances, March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loans individually
evaluated for impairment
|
|
$
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
-
|
|
|
|
134
|
|
Allowance for loans collectively
evaluated for impairment
|
|
$
|
1,598
|
|
|
|
3,108
|
|
|
|
3,421
|
|
|
|
2,542
|
|
|
|
78
|
|
|
|
8
|
|
|
|
10,755
|
|
Balances, December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loans individually
evaluated for impairment
|
|
$
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
87
|
|
Allowance for loans collectively
evaluated for impairment
|
|
$
|
1,268
|
|
|
|
3,191
|
|
|
|
2,940
|
|
|
|
2,512
|
|
|
|
59
|
|
|
|
4
|
|
|
|
9,974
|
|
At March 31, 2016, the Bank had approximately $4.6 million of mortgage loans held-for-sale compared with approximately $19.4 million at December 31, 2015. Loans held-for-sale are carried at the lower of cost or market and consist of two distinct groups, secondary market and portfolio mortgage loans held-for-sale. Secondary market loans are typically sold at or before loan closing to an investor on a loan-by-loan basis and generally settle within two to four weeks of loan closing. At March 31, 2016 and December 31, 2015 the Bank had $1.6 million and $5.2 million, respectively of secondary market loans. Portfolio mortgage loans held-for-sale are maintained on the Bank’s core loan accounting system and sold in bulk or individually generally within one year of being classified as held-for-sale. All loan sales executed by the Bank include the transfer of servicing rights to the investor. The Bank had $3.0 million and $14.2 million of portfolio mortgage loans held-for-sale as of March 31, 2016 and December 31, 2015, respectively. For the three months ended March 31, 2016 the Bank sold $13.0 million of portfolio loans held-for-sale for a gain of $256,000. For the three months ended March 31, 2015 the Bank sold $11.2 million of portfolio loans held-for-sale loan for a gain of $236,000.
The secondary market mortgage sales are sold typically on a best efforts basis to investors that follow conventional government sponsored entities and the Department of Housing and Urban Development (HUD) guidelines. Generally, the investor has delegated underwriting authority to the Bank.
23
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Credit risk is generally transferred to the investors upon sale, however, the investors may hav
e recourse rights for up to six months after the loan sale during which the Bank would be obligated to repurchase the loan if the borrower defaults during the recourse period. Also, the purchase agreements require the Bank to make certain representations a
nd warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of the
se representations or warranties, the Bank is obligated to either repurchase the loan for the unpaid principal balance and related investor fees or make the investor whole for the economic benefits of the loan.
Based on information currently available, management believes that it does not have a material exposure to losses arising from borrower defaults or faulty representations and warranties that it has made in connection with its mortgage loan sales.
For portfolio mortgages, the Bank determines at origination if the loan will be held-for-investment or held-for-sale. If circumstances arise after origination that the loan is no longer sellable to investors or could be sold it is moved accordingly.
At March 31, 2016, the Bank has $137.9 million of home equity and consumer mortgage loans which are secured by first or second liens on residential properties. Foreclosure activity in this portfolio has been minimal. Any foreclosures on these loans are handled by designated Bank personnel and external legal counsel, as appropriate, following established policies regarding legal and regulatory requirements. The Bank has not imposed any freezes on foreclosures. Based on information currently available, management believes that it does not have material exposure to faulty foreclosure practices.
Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship.
The Bank has entered into interest rate swaps to facilitate customer transactions and meet their financing needs. Upon entering into these instruments, the Bank also entered into offsetting positions in order to minimize risk. These swaps qualify as derivatives, but are not designated as hedging instruments.
Interest rate swap contracts involve counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Bank, and results in credit risk. When the fair value of a derivative instrument contract is negative, the Bank owes the customer or counterparty and has no credit risk.
A summary of interest rate swaps to facilitate customer transactions as of March 31, 2016 and December 31, 2015 is included in the following table:
|
|
Notional Amount
|
|
|
Estimated Fair Value Included in Other Assets
|
|
|
Estimated Fair Value Included in Other Liabilities
|
|
|
|
(In Thousands)
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed / Receive variable swaps – March 31, 2016
|
|
$
|
32,398
|
|
|
|
1,094
|
|
|
|
1,094
|
|
Pay fixed / Receive variable swaps – December 31, 2015
|
|
|
18,443
|
|
|
|
417
|
|
|
|
417
|
|
As part of its activities to manage interest rate risk, the Bank enters into delayed interest rate swap agreements to manage exposure to future interest rate risk through modification of the Bank’s net interest sensitivity to levels deemed to be appropriate. The interest rate swap agreements were entered into to convert a portion of its forecasted variable-rate debt to a fixed rate, which is a cash flow hedge of a forecasted transaction.
In 2014 the Bank entered into three delayed interest rate swap agreements to manage exposure to future interest rate risk on deposits. The Bank receives a variable rate based on one month LIBOR from a counterparty and pays a fixed rate of interest. In 2015, the Bank terminated one of the derivative instruments with a notional value of $10.0 million for a loss of $393,000 that is carried in Accumulated Other Comprehensive (Loss) Income. Beginning in November 2015 the loss is being recognized on the Consolidated Statements of Income over the original terms of the contract of 66 months and will conclude in May 2021.
24
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In 2015 the Bank entered into one
interest rate swap agreement designated as a cash flow hedge intended to protect against the variability of cash flows on selected LIBOR based loans. The Bank receives a fixed rate of interest from a counterparty and pays a fixed rate.
The terms of the individual contracts within the existing relationship at March 31, 2016 and December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Forecasted Notional Amount
|
|
|
Receive Rate
|
|
|
Pay Rate
|
|
|
Term
|
|
Other Liabilities
|
|
|
Unrealized (Gain) Loss in Accumulated Other Comprehensive (Loss) Income
|
|
|
Other Liabilities
|
|
|
Unrealized (Gain) Loss in Accumulated Other Comprehensive (Loss) Income
|
|
|
|
(Dollars in Thousands)
|
|
Interest Rate Swap
|
|
$
|
-
|
|
|
1 month LIBOR plus 35 basis points
|
|
|
|
2.99
|
%
|
|
Nov. 2015 - May 2021
|
|
$
|
-
|
|
|
|
224
|
|
|
|
-
|
|
|
|
236
|
|
Interest Rate Swap
|
|
|
10,000
|
|
|
1 month LIBOR plus 35 basis points
|
|
|
2.98
|
|
|
May 2016
- May 2021
|
|
|
764
|
|
|
|
472
|
|
|
|
472
|
|
|
|
292
|
|
Interest Rate Swap
|
|
|
10,000
|
|
|
1 month LIBOR plus 35 basis points
|
|
|
3.03
|
|
|
March 2017
- May 2021
|
|
|
611
|
|
|
|
377
|
|
|
|
341
|
|
|
|
210
|
|
Interest Rate Swap
|
|
|
25,000
|
|
|
|
1.50
|
|
|
1 month LIBOR
|
|
|
April 2015 - April 2022
|
|
|
(522
|
)
|
|
|
(322
|
)
|
|
|
(272
|
)
|
|
|
(168
|
)
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
853
|
|
|
|
751
|
|
|
|
541
|
|
|
|
570
|
|
The cash flow hedges were determined to be fully effective during the periods presented. Therefore, no amount of ineffectiveness has been included in net income. The aggregate fair value of the interest rate swap is recorded in other liabilities with changes in fair value recorded in accumulated other comprehensive (loss) income, net of tax. If a hedge was deemed to be ineffective, the amount included in accumulated other comprehensive (loss) income would be reclassified into a line item within the statement of income that impacts operating results. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or the Bank discontinues hedge accounting. Related to the terminated hedge approximately $44,000 will be reclassified from accumulated other comprehensive (loss) income in the next twelve months.
(5)
|
Fair Value of Financial Instruments
|
FASB ASC 820,
Fair Value Measurements and Disclosures
, establishes the framework for fair value. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of the observable inputs that may be used to measure fair value. An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are described below:
|
·
|
Level 1 Inputs
– Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
·
|
Level 2 Inputs
– Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
|
25
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
·
|
Level 3 Inputs
– Unobservable inputs for determining the fair values of assets or liabilities that reflect management’s own assumptions about the assumptions that market participants would us
e in pricing the assets or liabilities. Unobservable inputs can be sensitive to changes that would cause a higher or lower fair value measurement.
|
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective March 31, 2016 and December 31, 2015. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
|
(a)
|
Securities Available-for-Sale
|
Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs, market spreads, and cash flows or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models are used, securities are classified within Level 3 of the valuation hierarchy.
The carrying amount of interest rate swap agreements is based on pricing models that utilize observable market inputs. The Company reflects these assets within Level 2 of the valuation hierarchy.
For purposes of potential valuation adjustments to its derivative positions, the Company evaluates the credit risk of its counterparties. Accordingly, the Company has considered factors such as the likelihood of default by its counterparties, its net exposures, and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting arrangements, as well as considering the amount of collateral securing the position. The Company reviews its counterparty exposure on a regular basis, and, when necessary, appropriate business actions are taken to adjust the exposure. The Company also utilizes this approach to estimate its own credit risk on derivative liability positions. To date, the Company has not realized any significant losses due to a counterparty’s inability to pay any net uncollateralized position. The change in value of derivative assets and derivative liabilities attributable to credit risk was not significant during the reported periods.
26
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, seg
regated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
Total Carrying Value in the Consolidated Balance Sheet
|
|
|
Quoted Market Prices in an Active Market
(Level 1)
|
|
|
Models with Significant Observable Market Parameters
(Level 2)
|
|
|
Models with Significant Unobservable Market Parameters
(Level 3)
|
|
|
|
(In Thousands)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (AFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
15,120
|
|
|
|
-
|
|
|
|
15,120
|
|
|
|
-
|
|
State and municipal securities
|
|
|
45,747
|
|
|
|
-
|
|
|
|
45,747
|
|
|
|
-
|
|
Corporate notes
|
|
|
12,760
|
|
|
|
-
|
|
|
|
12,760
|
|
|
|
-
|
|
Mortgage-backed securities
|
|
|
89,588
|
|
|
|
-
|
|
|
|
89,588
|
|
|
|
-
|
|
Total investment securities available-for-sale
|
|
|
163,215
|
|
|
|
-
|
|
|
|
163,215
|
|
|
|
-
|
|
Derivative assets
|
|
|
1,094
|
|
|
|
-
|
|
|
|
1,094
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
164,309
|
|
|
|
-
|
|
|
|
164,309
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
1,947
|
|
|
|
-
|
|
|
|
1,947
|
|
|
|
-
|
|
Total liabilities at fair value
|
|
$
|
1,947
|
|
|
|
-
|
|
|
|
1,947
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carrying Value in the Consolidated Balance Sheet
|
|
|
Quoted Market Prices in an Active Market
(Level 1)
|
|
|
Models with Significant Observable Market Parameters
(Level 2)
|
|
|
Models with Significant Unobservable Market Parameters
(Level 3)
|
|
|
|
(In Thousands)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (AFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
40,826
|
|
|
|
-
|
|
|
|
40,826
|
|
|
|
-
|
|
State and municipal securities
|
|
|
47,736
|
|
|
|
-
|
|
|
|
47,736
|
|
|
|
-
|
|
Corporate notes
|
|
|
12,587
|
|
|
|
-
|
|
|
|
12,587
|
|
|
|
-
|
|
Mortgage-backed securities
|
|
|
108,425
|
|
|
|
-
|
|
|
|
108,425
|
|
|
|
-
|
|
Total investment securities available-for-sale
|
|
|
209,574
|
|
|
|
-
|
|
|
|
209,574
|
|
|
|
-
|
|
Derivative assets
|
|
|
417
|
|
|
|
-
|
|
|
|
417
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
209,991
|
|
|
|
-
|
|
|
|
209,991
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
958
|
|
|
|
-
|
|
|
|
958
|
|
|
|
-
|
|
Total liabilities at fair value
|
|
$
|
958
|
|
|
|
-
|
|
|
|
958
|
|
|
|
-
|
|
The Company did not have any financial instruments classified within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015.
27
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Certain financial assets and financia
l liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairm
ent). Financial assets and liabilities measured at fair value on a nonrecurring basis include the following:
Certain impaired loans are reported at the fair value and are measured based on the value of the underlying collateral securing the loans and are determined using several methods. The fair value of real estate is generally determined based on appraisals by qualified licensed independent appraisers less estimated selling costs. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and/or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. As of March 31, 2016 and December 31, 2015, impaired loans with a carrying value of $1.1 million and $1.2 million, were reduced by specific valuation allowance allocations totaling $60,000 and $61,000 to a net reported fair value of $1.0 million and $1.1 million, respectively, based on collateral valuations utilizing Level 3 valuation inputs.
|
(b)
|
Other Real Estate Owned (OREO)
|
Other real estate is measured and reported on the value of the collateral securing the real estate and is determined based on appraisals by qualified licensed independent appraisers less estimated selling costs. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. There were no fair value adjustments as of March 31, 2016. As of December 31, 2015, OREO was $268,000. OREO is included in Level 3 of the valuation hierarchy.
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring level 3 fair value measurements at March 31, 2016 and December 31, 2015:
|
Fair value
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range (weighted average)
|
|
(In Thousands)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
$
|
156
|
|
|
Discounted appraisals
|
|
Appraisal adjustments
|
|
11% (11%)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
$
|
1,159
|
|
|
Discounted appraisals
|
|
Appraisal adjustments
|
|
10% - 21% (14%)
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
$
|
268
|
|
|
Discounted appraisals
|
|
Appraisal adjustments
|
|
6% (6%)
|
The Company monitors the valuation technique utilized by various pricing agencies, in the case of the investment securities to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the period ended March 31, 2016, there were no transfers between levels.
28
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
FASB ASC 820 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are measured and reported at fair value on a recurring basis or nonrecurring basis. The method
ologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discuss
ed below:
|
(a)
|
Cash and due from banks, federal funds sold, and interest-bearing time deposits in banks
|
The carrying amounts of cash and due from banks, federal funds sold, interest-bearing time deposits in banks and federal funds sold approximate their fair values due to their short-term nature and liquidity.
|
(b)
|
Securities held-to-maturity
|
Fair values for securities held-to-maturity are based on quoted market prices. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs, market spreads, and cash flows or quoted prices of securities with similar characteristics.
|
(c)
|
Mortgage loans held-for-sale
|
The inputs for valuation of these assets are based on the anticipated sales prices of these loans as the loans are usually sold within a few weeks to four months of their origination.
The carrying values, reduced by estimated inherent credit losses, of variable rate loans and other loans with short-term characteristics are considered fair values. For fixed rate loans, the fair values are calculated by discounting scheduled future cash flows using current interest rates offered on loans with similar terms adjusted to reflect the estimated credit losses inherent in the portfolio. This method of estimating fair value does not incorporate the exit price/market participant concept of fair value prescribed by ASC 820-10 and generally produces a higher value than an exit approach/market participant approach. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.
|
(e)
|
Deposits, Federal funds purchased, Federal Home Loan Bank of Cincinnati advances and subordinated debt
|
The fair values disclosed for demand deposits (e.g. interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amount). The carrying value of variable rate Federal Home Loan Bank of Cincinnati (FHLB) advances and Federal funds purchased approximate their fair values based on their short-term nature. The fair value of certificates of deposit, fixed rate advances from the FHLB and fixed rate subordinated debt are based on the discounted value of contractual cash flows, calculated using the discounted rate that equaled the interest rates offered at the valuation date for deposits of similar remaining maturities.
|
(f)
|
Off-balance sheet instruments
|
The fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credits do not represent a significant value to the Company until such commitments are funded and the Company does not include a fair value associated with these commitments. At March 31, 2016 and December 31, 2015 the fair value of the Company’s standby letters of credits were $58,000 and $55,000, respectively and reflects the off-balance sheet reserves included in other liabilities on the Consolidated Balance Sheets.
29
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The
estimated fair values of financial instruments at March 31, 2016 and December 31, 2015 were as follows:
|
|
Carrying Amount
|
|
|
Estimated Fair Value
|
|
|
Quoted Market Prices in an Active Market
(Level 1)
|
|
|
Models with Significant Observable Market Parameters
(Level 2)
|
|
|
Models with Significant Unobservable Market Parameters
(Level 3)
|
|
|
|
(In Thousands)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
24,671
|
|
|
|
24,671
|
|
|
|
24,671
|
|
|
|
-
|
|
|
|
-
|
|
Federal funds sold
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
-
|
|
|
|
-
|
|
Interest-bearing time deposits in banks
|
|
|
216
|
|
|
|
216
|
|
|
|
216
|
|
|
|
-
|
|
|
|
-
|
|
Securities available-for-sale
|
|
|
163,215
|
|
|
|
163,215
|
|
|
|
-
|
|
|
|
163,215
|
|
|
|
-
|
|
Securities held-to-maturity
|
|
|
11,913
|
|
|
|
11,981
|
|
|
|
-
|
|
|
|
6,481
|
|
|
|
5,500
|
|
Mortgage loans held-for-sale
|
|
|
4,583
|
|
|
|
4,612
|
|
|
|
-
|
|
|
|
4,612
|
|
|
|
-
|
|
Loans, net
|
|
|
946,628
|
|
|
|
941,101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
941,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
966,496
|
|
|
|
967,122
|
|
|
|
788,566
|
|
|
|
178,556
|
|
|
|
-
|
|
Federal funds purchased
|
|
|
3,001
|
|
|
|
3,001
|
|
|
|
3,001
|
|
|
|
-
|
|
|
|
-
|
|
Federal home loan bank advances
|
|
|
105,500
|
|
|
|
105,635
|
|
|
|
-
|
|
|
|
105,635
|
|
|
|
-
|
|
Subordinated debt
|
|
|
19,628
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
|
311,153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby letters of credit
|
|
|
11,375
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
Estimated Fair Value
|
|
|
Quoted Market Prices in an Active Market
(Level 1)
|
|
|
Models with Significant Observable Market Parameters
(Level 2)
|
|
|
Models with Significant Unobservable Market Parameters
(Level 3)
|
|
|
|
(In Thousands)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
34,479
|
|
|
|
34,479
|
|
|
|
34,479
|
|
|
|
-
|
|
|
|
-
|
|
Federal funds sold
|
|
|
675
|
|
|
|
675
|
|
|
|
675
|
|
|
|
-
|
|
|
|
-
|
|
Interest-bearing time deposits in banks
|
|
|
216
|
|
|
|
216
|
|
|
|
216
|
|
|
|
-
|
|
|
|
-
|
|
Securities available-for-sale
|
|
|
209,574
|
|
|
|
209,574
|
|
|
|
-
|
|
|
|
209,574
|
|
|
|
-
|
|
Securities held-to-maturity
|
|
|
11,937
|
|
|
|
11,964
|
|
|
|
-
|
|
|
|
6,464
|
|
|
|
5,500
|
|
Mortgage loans held-for-sale
|
|
|
19,441
|
|
|
|
19,584
|
|
|
|
-
|
|
|
|
19,584
|
|
|
|
-
|
|
Loans, net
|
|
|
835,760
|
|
|
|
831,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
831,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
969,603
|
|
|
|
969,790
|
|
|
|
842,951
|
|
|
|
126,839
|
|
|
|
-
|
|
Federal home loan bank advances
|
|
|
68,000
|
|
|
|
68,007
|
|
|
|
-
|
|
|
|
68,007
|
|
|
|
-
|
|
Subordinated debt
|
|
|
19,617
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
|
310,209
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby letters of credit
|
|
|
10,829
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
30
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(6)
|
Commitments and Contingent Liabilities
|
The Bank is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.
The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making off-balance sheet commitments as it does for on balance sheet instruments.
The following financial instruments were outstanding whose contract amounts represent credit risk:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
Commitments to extend credit and unfunded commitments
|
|
$
|
311,153
|
|
|
|
310,209
|
|
Standby letters of credit
|
|
|
11,375
|
|
|
|
10,829
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Bank is committed.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. All letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Bank had $58,000 and $55,000 in off-balance sheet reserves included in other liabilities on the Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015, respectively.
From time to time, the Company may be a party to various legal proceedings incident to its business. As of March 31, 2016 there are no material pending legal proceedings to which the Corporation or any of its subsidiaries is a party or of which any of the Corporation or its subsidiaries’ properties are subject.
The Corporation and the Bank file consolidated U.S. Federal and State of Tennessee income tax returns. Each entity provides for income taxes based on its contribution to income or loss of the consolidated group. ASC 740,
Accounting for Income Taxes
, defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more likely than not” to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement, and classification of income tax uncertainties in interim periods. As of March 31, 2016, the Company had no unrecognized tax benefits related to federal or state income tax matters. The Company accounts for interest and penalties, if any, as a component of income tax expense.
The Company’s effective tax rate for the three months ended March 31, 2016 was 33.9%, compared with 33.5% for the three months ended March 31, 2015. The effective tax rate differs from the statutory Federal rate of 34% and Tennessee excise rate of 6.5% primarily due to investments in qualified municipal securities; company owned life insurance and certain non-deductible expenses.
31
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(8)
|
Minimum Regulatory Capital Requirements
|
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative criteria by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).
In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank and the Corporation. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (Basel III) and changes required by the Dodd-Frank Act.
Under these rules which became effective on January 1, 2015, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules also include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes "capital" for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital.
The rules also establish a "capital conservation buffer" of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in:
(i) a common equity Tier 1 risk-based capital ratio of 7.0%,
(ii) a Tier 1 risk-based capital ratio of 8.5%, and
(iii) a total risk-based capital ratio of 10.5%.
The capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
As of March 31, 2016, management believes the Corporation and the Bank met all capital adequacy requirements to which they are subject to be classified as Well Capitalized and in compliance with the capital conservation buffer requirement. There are no conditions or events that have occurred since March 31, 2016 that management believes have impacted the Corporation and the Bank’s regulatory capital classification.
The Corporation’s charter authorizes 10,000,000 shares of preferred stock, no par value. Shares of the preferred stock may be issued from time to time in one or more series, each such series to be so designated as to distinguish the shares from the shares of all other series and classes. The Board of Directors has the authority to divide any or all classes of preferred stock into series and to fix and determine the relative rights and preferences of the shares of any series so established.
In October 2008, the Emergency Economic Stabilization Act of 2008 was enacted and the U.S. Department of the Treasury (Treasury) announced the Troubled Asset Relief Program Capital Purchase Program (CPP). On February 27, 2009, the Corporation entered into a Letter of Agreement with Treasury pursuant to which, among other things, the Corporation sold to Treasury for an aggregate purchase price of $7.4 million, 7,400 shares of Series A Preferred Stock and a warrant to purchase up to 370 shares of Series B Preferred Stock. The warrant was exercised by Treasury concurrent with the Series A Preferred Stock purchase.
On September 15, 2011, the Corporation redeemed all preferred shares the Corporation originally issued to Treasury under the CPP. The Corporation paid Treasury approximately $7.8 million, which included accrued dividends. Concurrently, the Corporation entered into a Securities Purchase Agreement with Treasury, pursuant to which the Corporation issued 18,950
32
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
shares of Senior Non Cumulative Perpetual Preferred Stock, S
eries C (Preferred Stock), having a liquidation amount per share of $1,000, for a total purchase price of $18,950,000. The Corporation contributed $18.14 million of the purchase price to its wholly owned subsidiary, the Bank. On March 2, 2015, the Corporat
ion redeemed all 18,950 outstanding shares of the Preferred Stock at a redemption price of $1,000 per share, plus any unpaid and accrued dividends.
Dividends
. The Corporation has not paid any cash dividends on our common stock since inception; however, our growth plans may provide the opportunity for us to consider a dividend program at some point in the future. Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Tennessee Department of Financial Institutions, pay any dividends to the Corporation in a calendar year in excess of the total of the Bank’s net profits for that year plus the retained profits for the preceding two years. Our future dividend policy will depend on earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to us.
(10)
|
Accumulated Other Comprehensive Income (Loss)
|
Significant amounts reclassified out of Accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 are as follows:
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
Amounts Reclassified From Accumulated Other Comprehensive Income (Loss)
|
|
Affected Line Items in the Consolidated Statements of Income
|
|
2016
|
|
|
2015
|
|
|
|
|
|
(In Thousands)
|
|
Gains realized on sale of
investment securities
|
|
Net gain on sale of
available-for-sale securities
|
|
$
|
228
|
|
|
|
-
|
|
Tax effect
|
|
Income tax expense
|
|
|
(87
|
)
|
|
|
-
|
|
Loss realized on termination of
cash flow hedge
|
|
Interest expense: deposits
|
|
|
18
|
|
|
|
-
|
|
Tax effect
|
|
Income tax expense
|
|
|
(7
|
)
|
|
|
-
|
|
Total reclassifications out of accumulated other comprehensive income
|
|
$
|
152
|
|
|
|
-
|
|
The activity in accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
Unrealized Gains (Losses) on Securities Available-for-Sale
|
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
|
Total
|
|
|
Unrealized Gains (Losses) on Securities Available-for-Sale
|
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Beginning Balance, January 1
|
|
$
|
(2,061
|
)
|
|
|
(570
|
)
|
|
|
(2,631
|
)
|
|
|
(2,108
|
)
|
|
|
(377
|
)
|
|
|
(2,485
|
)
|
Other comprehensive income (loss)
before reclassifications
|
|
|
1,925
|
|
|
|
(192
|
)
|
|
|
1,733
|
|
|
|
1,639
|
|
|
|
(511
|
)
|
|
|
1,128
|
|
Amounts reclassified from
accumulated other
comprehensive loss
|
|
|
141
|
|
|
|
11
|
|
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Period Change
|
|
|
2,066
|
|
|
|
(181
|
)
|
|
|
1,885
|
|
|
|
1,639
|
|
|
|
(511
|
)
|
|
|
1,128
|
|
Ending Balance, March 31
|
|
$
|
5
|
|
|
|
(751
|
)
|
|
|
(746
|
)
|
|
|
(469
|
)
|
|
|
(888
|
)
|
|
|
(1,357
|
)
|
(11)
Subsequent Events
On January 28, 2016, the Corporation entered into an Agreement and Plan of Merger with Pinnacle Financial Partners, Inc., a Tennessee corporation (Pinnacle) providing for the merger of the Corporation with and into Pinnacle, with Pinnacle being the surviving entity. The proposed merger of the Corporation with and into Pinnacle has been approved unanimously by each company’s Board of Directors and is expected to close either late in the second quarter or early in the third quarter of 2016.
33
AVENUE FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Completion of the transaction is subject to satisfaction of customary closing conditions, including the receipt of required regulatory approvals and the approval of the Corporation’s shareholders.
Under the terms of the merger agreement, the Corporation’s shareholders will receive 0.36 shares of Pinnacle’s common stock and $2.00 in cash for every Corporation share. All fractional shares will be cashed out based on the average 10-day closing price of Pinnacle common stock as of the closing. Additionally, the Corporation’s outstanding stock options and unvested shares of restricted stock will be fully vested upon consummation of the merger pursuant to the Corporation’s stock option plan, and all outstanding options that are unexercised prior to the closing will be cashed out at $20 per share. At closing, and assuming all outstanding Corporation options are cashed out as of the merger date, Avenue shareholders will own approximately 8.1 percent of the combined firm on a fully diluted basis.
On May 9, 2016 a purported class action complaint was filed in the Chancery Court for the State of Tennessee, 20
th
Judicial District at Nashville, styled
Stephen Bushansky, on behalf of himself and all others similarly situated, Plaintiff, versus Avenue Financial Holdings, Inc. Ronald L. Samuels, Kent Cleaver, David G. Anderson, Agenia Clark, James F. Deutsch, Marty Dickens, Patrick G. Emery, Nancy Falls, Joseph C. Galante, David Ingram. Stephen Moore, Ken Robold, Karen Saul and Pinnacle Financial Partners, Inc., Defendants (Case No. 16-489-IV)
, alleging that the individual defendants breached their fiduciary duties by, among other things, approving the sale of the Company for an inadequate price as the result of a flawed sales process, agreeing to the inclusion of unreasonable deal protection devices in the Merger Agreement, approving the transaction in order to receive benefits not equally shared by all other shareholders of the Company, and issuing materially misleading and incomplete disclosures to shareholders. The lawsuit also alleges claims against the Company and Pinnacle Financial Partners, Inc. for aiding and abetting the individual defendants’ breaches of fiduciary duties. The plaintiff purports to seek class-wide relief, including but not limited to: an injunction enjoining Defendants from proceeding with the Merger, monetary damages, and an award of interest, attorney’s fees, and expenses. The Company believes the claims asserted in this action to be without merit and intends to vigorously defend the litigation. However, at this time, it is not possible to predict the outcome of the proceeding of its impact on the Company or the proposed Merger.
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